The Great Recession rocked the housing market; many homeowners owed more on their mortgage loans than their homes were worth and short sales were common.
What is a short sale in real estate?
A short sale is a property that’s sold for less than its owner’s mortgage debt. A short sale allows a homeowner struggling under mortgage debt to work with their lender to sell their home. This results in less damage to the homeowner’s credit than what a foreclosure causes.
While you don’t see them as often in 2019, short sales are still a resource for homeowners struggling to keep up with their mortgage payments.
Short sales are attractive to first-time buyers and investors hoping to flip or rent, as they are typically priced under market value.
Difference Between Short Sale And Foreclosure
A short sale is not the same thing as a foreclosure, although many home buyers get them confused. What is the difference, exactly?
Unlike a short sale in which an agreement is reached between the mortgage lender and the homeowner, a foreclosure is a forced legal process that happens when a homeowner is unable to make mortgage payments for a significant period of time.
A foreclosed home is a property that the mortgage company has taken into possession. These homes are typically winterized (plumbing drained and water turned off), unlike short sale homes.
A short sale is a pre-foreclosure home for which the mortgage lender has agreed to accept less than the outstanding mortgage balance to avoid foreclosure proceedings. The lender may forgive the difference or the existing homeowner may have to make arrangements to settle the remaining amount.
Foreclosed homes are only purchased at an auction, cash only and sight unseen. This means the buyer can’t have the home inspected. If the home doesn’t sell at an auction, the lender retains the home and tries to sell it themselves as a real estate owned (REO) property.
If you’re buying one of these properties, you’ll want to pay special attention to the title insurance. While buying the property may clear the lien from the lender who is selling it, there may be secondary links tied to the house as well.
Effects Of Short Sale And Foreclosure On Mortgage Qualification
As a seller in a short sale or foreclosure situation, a natural question may be how much a foreclosure or short sale will affect your ability to get a mortgage in the future. We put together a short table which should help answer some of the more common questions. The mortgage qualification standards referenced below are those of Quicken Loans®. Other lenders may have different guidelines.
|How much is your credit score affected?||While it’s impossible to definitively say how individuals will be affected because your credit score is based on your entire history, the drop is typically 120 – 130 points for VantageScore®. Although slightly different than the FICO® models most often used by lenders, the formulas are comparable.||The usual drop might be 130 – 140 points.|
|How long does it stay on your credit report?||7 years either from the date you were first late on your payments or the date that the short sale closed (if your mortgage was paid in full and on time up to that point)||7 years from the date of your first late payment|
|How does it affect your mortgage options?||Options are limited, but you may be able to do something immediately after the short sale is completed. More traditionally, you can get an FHA loan within the 3-year period after the short sale if you have no late payments on mortgage and installment loans in the year leading up to the short sale as well as in the year leading up to your new application. There are no restrictions on FHA or USDA loans if 3 years has already passed. For a VA loan, the waiting period is 2 years provided you’re qualified credit-wise. Conventional loans require a 4-year waiting period.||If you qualify, there may be one option a year after the foreclosure. A VA loan has a 2-year waiting period, subject to credit guidelines. FHA and USDA loans are available after 3 years. Conventional loans aren’t allowed until 7 years have passed.|
A short sale is regarded as better than a foreclosure by a lender considering your future mortgage application because it shows you’re trying to take responsibility and pay what you can rather than throwing your hands up and walking away.
Either way, these alternatives also represent a serious credit hit. Although the impact is lessened as time passes, either one can seriously lower your score. To get an idea of the potential effect, our friends at Rocket HQSM have a credit simulator. With this simulator you’re able to see your free VantageScore 3.0® credit score and report every week courtesy of TransUnion®. Because this is a soft pull not related to a loan or credit application, this won’t lower your score.
Of course, neither option is pleasant for someone facing short sale or foreclosure. Your mortgage servicer, whoever you make your monthly payments to, would also like to help you avoid these outcomes as well.
If you’re a Quicken Loans client struggling to make your mortgage payment, we may have options to help. Please call our servicing team at (800) 508-0944.
How Does The Short Sale Process Work?
Even though a short sale isn’t preferable, it might be the best option for some people. With that in mind, let’s walk through the process of a typical short sale with a sample scenario.
Let’s say Alex, a 33-year-old accountant, is struggling to meet mortgage payments and needs to do a short sale on their home. How do they do this?
First, Alex files a hardship letter with their lender explaining why the mortgage can’t be fully repaid along with documentation like pay stubs and tax returns. Alex’s mortgage lender then decides to approve the home for a short sale, and the property is designated as a short sale in the sales listing.
Let’s say Gina and Tina are first-time home buyers. For their new home they need a place that is bright and roomy enough for their three cats, two birds and a golden retriever. They fall in love with Alex’s short sale home. Best of all, they can afford it since the sale price is below market value! Gina and Tina send their offer directly to the lender.
The time frame in a short sale varies from that of a traditional home sale. Alex’s lender can take weeks (or months) to reply to Gina and Tina’s offer. If the lender accepts their short sale offer, the lender can ask Gina and Tina to close the loan quickly, which will typically be in a couple of weeks.
If Gina and Tina can’t make that deadline, the sale goes back to square one. Either they will sign a new purchase offer with the same seller or start looking elsewhere for their future home.
Getting the bid accepted by a lender requires a little more finesse because the listing agent representing the lender in the sale is looking for specific things within the offer. A real estate agent with experience in these types of sales can be very helpful. If you don’t have one yet, our friends at Rocket Homes Real Estate LLC can match you up with a real estate agent in your area who will help you find what you’re looking for.1,2
Speeding Up The Short Sale Home Buying Process
Some lenders (including Quicken Loans) offer special programs so that they can begin underwriting the new loan as soon as the buyer has signed a purchase agreement. This can give buyers like Gina and Tina a smoother path to close the loan on their dream home.
The best thing someone can do if they are working to have a smoother process buying a short sale (or any home, really) is to make sure they’ve been approved for financing in advance. Some lenders call this preapproval or prequalification. These terms can mean two different things but are often used interchangeably. To diffuse any confusion, Quicken Loans breaks down mortgage approval into three distinct levels so that everyone (including you, the seller and the other involved lender) knows just where they stand. We call this the Power Buying ProcessSM.
In a Prequalified Approval, you have your credit report and score pulled. This is important for a couple of reasons.
When looking at loan options, lenders base your qualifications on the lowest median FICO® Score of all clients on the loan.
That might sound a bit confusing, so let’s say you and your spouse are on a loan together. You have FICO® Scores of 710, 680 and 670 between the three major credit bureaus. Your spouse has scores of, 670, 650 and 630. The score that counts is 650 because it’s the lowest median score between the two of you.
The second thing that lenders can look at once pulling your credit is your debts on both revolving debts (like credit cards) and installment debts (like student loans, personal loans, mortgages and auto loans). Coupled with your verbal or written estimates of your income and assets for your down payment, your lender is then able to calculate your debt-to-income ratio (DTI). This is extremely important because it’s how lenders calculate how much you can afford. Your DTI is a simple ratio calculated using the following formula:
Let’s run through a quick example. If you make $48,000 per year and have monthly minimum credit card payments between accounts totaling $200 and $1,400 in installment debts, your DTI is 40% ($1,600/$4,000 = 0.4).
There are drawbacks to a Prequalified Approval. Because a lender is taking your word for it regarding your income and assets, this isn’t considered a very strong approval. As a result, sellers and lenders in a short sale situation will likely not consider this. It’s a great estimate of what you can afford, but that’s all it is. Instead, we recommend all of our clients take the next step and get a Verified ApprovalSM.
In a Verified ApprovalSM, the process again begins with a credit check. The difference here is that your income and asset documents are also verified. This means that we have documentation that you can afford the loan up front. This makes your offer much more appealing to anyone but particularly to a lender in a short sale situation. Your offer has strength comparable to that of a cash buyer.
We want you to feel extremely confident in the offers you make. If through no fault of your own your loan doesn’t close after getting a Verified ApprovalSM, we’ll give you $1,000.3
While knowing how much you can afford is extremely important, we’re betting it’s also important to you that you not pay more than you have to for your mortgage each month. We have an option to address that as well.
Traditionally, you’ve had to wait until you find a house in order to lock your rate. This can create a lot of anxiety for home buyers looking to find a home before rates rise. However, finding the right home for you and your family isn’t something you want to rush.
With RateShieldSM Approval,4 you have the ability to lock your interest rate for up to 90 days while shopping for a home. Should you find a home at any point during that time frame, we compare the interest rate you locked to current rates on the day you send in your purchase agreement.
If rates go up, your rate stays the same. If rates go down, your rate drops. Either way, you win!
Benefits And Drawbacks For Seller And Buyer
There are benefits and drawbacks to short sales for both the buyer and seller.
|Benefits For The Seller||Drawbacks For The Seller||Benefits For The Buyer||Drawbacks For The Buyer|
|A short sale is better for your credit than a foreclosure because at least short sales show that you’re reaching a settlement with the lender rather than just letting the home go. Because of this, you can get a mortgage faster through a short sale than you can with a foreclosure.
The lender pays any closing costs typically paid by the seller and anything the lender and the buyer might negotiate.
This may be somewhat less emotionally stressful than a foreclosure where the house is sold without you having a choice.
|Because you’re selling the property for less than what it’s worth, you’re not making any money on the deal.
The lender has to approve the offer, and you don’t have any autonomy in determining who you sell your home to.
Although there’s less of a credit hit, not paying off your mortgage in full can still do significant damage to your credit score. If you can, it always makes more sense to keep making payments until you can find a buyer who will at least pay enough to pay off your loan. Depending on the state of the housing market, this isn’t always possible, but it’s a good goal.
|In a short sale, a lender is motivated to sell the property if they’re able to recoup a good portion of their investment because the seller can no longer make the payments. Therefore, you may be able to get a better deal if a lender is looking to cut their losses.
There’s often less competition for short sales due to the fact that it’s a longer process and properties are sold as is. This repels a portion of the market.
|It can be a much longer process to get the deal done because the lender has to approve the offer and do lots of paperwork on their end.
There’s a risk you could start the process and the deal doesn’t close at all. If the seller was previously making mortgage payments and they stop in the middle of the short sale process, the home could go into foreclosure and you can lose the groundwork you laid.
Properties are sold as is, meaning they could need some work.
Because they’re trying to recover as much money as possible, lenders may not be as willing to help a buyer with closing costs.
In any case, it’s better to sell short than to go through the foreclosure process. For the buyer, purchasing a short sale may result in you getting a better deal.
Tips For Buying A Short Sale
Are you interested in buying a short sale? Here are some helpful tips to get you started:
- Make the right offer.While a short sale may enable you to get a good deal, don’t go too low with your offer. Remember that the lender’s motivation in this scenario is to recover as much money as possible. An experienced real estate agent with a deep understanding of the local market will be able to help you here.
- Don’t attach too many contingencies.These properties are usually sold as is, meaning the lender won’t be putting in work to the house before selling it. If you want a bunch of work done, the lender is likely to reject your offer out of hand.
- Get a home inspection.Just because the lender won’t necessarily fix things doesn’t mean you shouldn’t know what you’re getting into after you close the loan. Getting an inspection to highlight any issues with the home is highly recommended, particularly when you could be buying a distressed property.
- Be patient.A purchase loan often closes in as little as 30 days. Working with a lender on a short sale could take much longer. It’s not uncommon for the process to take as long as 4 months.
- Know what the closing costs will be.A lender may be less willing to meet you in the middle on closing costs because they need to recover as much money as possible. Be prepared to pay for the bulk of the closing costs typically paid by buyers.
If you’re looking to buy a home and purchasing a short sale sounds like something you would be interested in, you can get started online or speak with a Home Loan Expert today at (800) 785-4788. Our experts can help navigate you through the twists and turns of buying a short sale property. As always, any time you make a big financial decision like doing a short sale or buying a short sale home, we recommend speaking with a financial advisor because every situation is different.
Have you purchased a home in a short sale transaction? Share your experience in the comments below!
1Quicken Loans® and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.
2 Rocket Homes Real Estate LLC License Numbers: MI 6505-346028; AL 000116893-0; AZ LC682664000; CO EC.100073419; FL CQ1053125; GA 75702; IN RC51700193; KY 245277; LA BROK.0995700664-CORP; MA 422609; MD 668189; MN 40608594; MO 2017021670; NC C27494; NJ 1757866; NV 2017306335; NY 10991228813; OH REC.2018004495; PA RB068594; SC 22050; TN 263727; UT 11215866-CN00; VA 0226028421; WA 20438; WI 938151-91; Rocket Homes Real Estate IL LLC License Number: 481.01277. Rocket Homes℠and the Rocket Homes℠logo are service marks licensed to Rocket Homes Real Estate LLC. Rocket Homes Real Estate LLC fully supports the principles of the Fair Housing Act and the Equal Opportunity Act. The Rocket Homes Real Estate LLC main office is located in Detroit, MI. Contact: (888) 468-4735.
3Participation in the Verified ApprovalSM program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
4RateShieldSM Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Quicken Loans reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Quicken Loans. This is not a commitment to lend. Additional conditions or exclusions may apply.
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